Cross-Sectional Analysis

Posted: August 26th, 2021

Student’s Name

Instructor’s Name

Course

Date

Cross-Sectional Analysis

Analysis of Liquidity and Turnover Ratios

The dairy industry in Australia has several players, both public and private entities, who adopt diverse strategies in the manufacture, substitution, product mix, and differentiation, to gain competitive advantage. The major dairy companies in the sector include A2 Milk Company, Fonterra, Saputo, and Synlait. Cross-sectional analysis of the companies enables a comparison of the entities among their counterparts with different profitability, financial ratios, and accounting information(Goel 124-149). The paper providesa comparative analysis of the performance of A2 Milk Company with its competitors, which include; Fonterra, Saputo, and Synlait. It also reveals different dimensions in operations, management, and financial strategies adopted by the entities. Therefore, the analysis discloses economic trends comparing A2 Milk Company to its competitors and its performance using the financial ratios of the year 2019.

The liquidity ratios for 2019 indicate that A2 Milk Company performed better as it out-performed its competitors, Fonterra, Saputo, and Synlait. The current ratio of A2 Milk Company is 3.3 compared to 1.622 of Saputo, 1.167 of Fonterra, and lastly, 0.8 of Synlait Milk Limited. Additionally, the quick or acid-test ratio of A2 Milk Company is higher than its counterparts (See Excel Sheet 2). The quick ratio of A2 Milk Company is 2.8 for the year ended 2019 while its competitors were raging behind with Saputo 0.7518, Fonterra 0.578, and finally, Synlait Milk Limited with 0.3. Furthermore, the cash ratio also depicts the same trend. In this case, the A2 Milk Company performed better than its competitors. The cash ratio of A2 Milk Company is the highest among the four companies as it posted 2.3, followed by Fonterra at 0.12, Saputo 0.0583, while Synlait Milk Limited posted zero(See Excel Sheet 2). Therefore, from the liquidity ratios, A2 Milk Company is better positioned to meet its short-term financial obligations as they fall due since it has the highest liquidity ratios.

Further, analysis of turnover ratios shows A2 Milk Company is performing better than its competitors. In the inventory turnover, Saputo out-performed its competitors. It has the highest frequency demonstrated in high stock turnover with a short periodwith a ratio of 9.26, followed by A2 Milk Company with 6.8, Fonterra 5.835, and lastly, Synlait Milk Limited 5.54. A2 Milk Company has the highest capital employed turnover of 2.7, followed by Saputo with a ratio of 1.698, Fonterra 1.666, while Synlait Milk Limited posted a negative figure of -154.47. It indicates that the A2 Milk Company currently has the best management efficiency in the company.  A2 Milk Company has the lowest payable turnover compared to its competitors implying that it takes the shortest period to settle the company creditors, indicating it has a good relationship with its suppliers. A2 Milk Company has a payable turnover frequency of 8.5, followed by Fonterra with 11.19, Saputo at 14.26, and finally, Synlait Milk Limited 12.6. Finally, receivables turnover of Synlait Milk Limited is the lowest at 17.2 days, then A2 Milk Company at 22.1 days, Saputo at 25.6 days, and Fonterra 32.63 days. A high receivables turnover ratio implies that a company has a conservative credit policy, and a low ratio indicates that the company has a poor collection policy(See Excel Sheet 2). Hence, A2 Milk Company is adequately managing its debtors with a conservative strategy of the 20-days credit period. Consequently, from both liquidity and turnover ratios, A2 Milk Company performs better than its competitors as the financial metrics are high and out-perform the rest. Compared to its competitors, the results of liquidity ratio implies that that A2 Milk Company,can meet its short-term obligations. Besides, its assets can easily be converted to cash whenever needed. Thus, the high liquidity ratio means that it has proper management of its liabilities or obligations compared to its competitors in the industry.

Works Cited

Goel, Sandeep. Financial statements analysis: cases from corporate India. London: Routledge/Taylor & Francis Group, 2014. Print.